The Japanese yen took the spotlight today after a surprise policy move from the Bank of Japan.
This turned CAD/JPY as the forex pair to watch this week ahead of top tier catalysts from Canada on Wednesday.
Yen bulls came back raging like Black Adam from his eternal prison after the Bank of Japan stunned the markets by raising the cap on 10-year Japanese bond yields to 0.50% from 0.25%.
Traders seem to be taking this a potential shift away from their easy monetary policy stance, which they’ve held despite rising inflation data and the tightening policy stance we’ve seen from their counterparts across the world.
BOJ Governor Haruhiko signaled to markets that this wasn’t the case, explaining that this was done to sustain its monetary easing policy, so it remains yet to be seen if this is truly a sea change away from the extremely stimulative policy the BOJ has held for more than a decade.
So, traders may wanna take a hard look at a potential longer-term bullish move ahead for the yen, or at the very least a pick up in volatility. And they may want to do so against the Canadian dollar, which could potentially see a pick up in volatility with Canadian inflation data coming on Wednesday.
The current forecast is for the headline m/m CPI read to be near flat in November, so any deviation from there should get traders repricing the Loonie very quickly. The general inflation trend across the globe has been high but slowing, so the bigger move may come from a print above 0.0% m/m tomorrow.
We’ve also got the monthly GDP read from Canada on Friday, but most releases do not yield a big market reaction. So while we’re aware just in case there’s a major surprise, odds are it’s probably not going to be a price driver.
Of course, there are dozens of other ways the environment and headlines could shift this week, but with the current picture above, the trend favors CAD/JPY bears at the moment.
And we’re getting that same picture from a technical perspective as the pair has been slowly grinding lower since the bearish signals we noted in early November, and settled into a consolidation pattern between 99.50 and 101.00 before breaking lower on the BOJ news.
With these factors in mind, that trend doesn’t look to break without a major upside surprise form Canadian inflation data and/or another major announcement from the Bank of Japan to turn yen sentiment.
If you’re considering a bearish position on CAD/JPY, there could be potential resistance around the previous consolidation/falling SMAs if retested, an area to consider shorting to improve the potential return-on-risk.
For those who don’t see the market making its way all the way back up to that area, scaling-in at various levels up to that area is an entry strategy to consider as well, especially with Canadian inflation ahead.
A logical stop area would be above the consolidation area pattern, but for the more conservative traders or longer-term players, setting a stop above the falling 200 SMA makes sense as well if you’re willing to give up some potential return.
As for potential profit targets, there aren’t any recent support levels to point to, but using the average weekly volatility range of 2.83, potential buying support may appear between 94.00 to 96.00 in the short-to-medium term.
How every you decide to setup your trade, just make sure you practice proper risk management when trading the news and never risk more than 1% on any single trade!
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
